Expense Ratios: What 0.85% Actually Costs You

In the first year, a 0.85% expense ratio on $400 a month costs you about $19. That is the number people check, decide is trivial, and never look at again. In year thirty the same fee takes $3,379, and over the full thirty years it has removed $70,624 from the balance.

Nothing about the fee changed. What changed is what it is charged on, and that is the part almost nobody explains. The fee is the most predictable thing about a fund and the reason it matters more than which index fund you pick, because it is subtracted whether the market rises or falls.

What is the expense ratio charged on, and when?

An expense ratio is an annual percentage of fund assets. Not of your gains, and not of your contributions. Of everything you hold.

It is deducted daily, in slices, from inside the fund, before the share price you are quoted. So the price you see is already net of it. No statement line will ever read "fee: $3,379", no payment leaves your account, and you cannot opt out of it. The SEC's page on investment fees makes the mechanism plain: the charge comes out of fund assets, which is why it is invisible.

Two consequences follow, and they are the whole article.

The first is that a bad year costs you twice. If the fund falls 18%, the fee is still taken, on a balance that has just shrunk. There is no version of the charge that waits for a profit.

The second is that the fee grows with you. At a $5,000 balance, 0.85% is $43 a year. At a $400,000 balance it is $3,400 a year, for exactly the same service, on a fund that does exactly the same thing it did when you had $5,000 in it. A percentage charge on a compounding balance compounds too.

What does the compounding actually look like, year by year?

The same $400 a month, for thirty years, at 7% a year before fees. One path pays 0.04%, which is roughly what a total-market index fund charges. The other pays 0.85%, which is roughly what a mediocre 401(k) menu offers.

Read the gap column downwards. After ten years the two savers are $2,994 apart, which on a $69,082 balance is a rounding error and feels like one. After twenty years the gap is $19,225. In the last ten years alone it widens by $51,399.

That shape is the trap. The fee is cheapest to fix in year one, when it has cost you $18 and nobody is paying attention, and impossible to fix in year twenty-five, when the damage has already been done to a balance you can no longer rebuild.

How much of the final balance is that?

$70,624 out of $484,154 is 14.6%. Roughly one seventh of the money, gone to a difference of eight tenths of one percent a year.

A second comparison lands harder. Over thirty years you contributed $144,000 of your own money, at $4,800 a year. The fee took $70,624. That is 14.7 years of contributions: you worked, saved and transferred money for nearly fifteen of those thirty years to cover the difference between two funds holding almost identical companies.

We think this is the single most under-weighted decision in ordinary investing, and it is under-weighted precisely because it is painless. Nobody has ever felt 0.85%.

What if your 401(k) charges twice?

Many do. There is the fund's own expense ratio, and separately a plan administration fee, often 0.30% to 0.60% of assets, charged by the record-keeper for running the plan.

Stack a 0.45% plan fee on the 0.85% fund and the total drag is 1.30%. The same thirty years end at $379,505 rather than $484,154, a difference of $104,649.

The Department of Labor puts the same point in round numbers, and it is worth quoting because it is the regulator's own arithmetic rather than ours. On a $25,000 balance left alone for 35 years at 7%, fees of 0.5% produce $227,000 and fees of 1.5% produce $163,000. Their conclusion: a one percentage point difference reduces the final balance by 28%.

Where do you find yours?

Four clicks, about ten minutes, and you will need to be signed in to your plan or brokerage.

1. Open your account and list every fund you hold, by ticker. Most people have between one and four and are surprised by at least one of them.
2. Search each ticker on the provider's site. The fund page states the expense ratio, usually near the top. If it shows both a gross and a net ratio, the net is what you pay now and the gross is what you pay when a temporary fee waiver expires. Note both.
3. In a 401(k), find the annual fee disclosure. Plans are required to send one, it lists every fund's ratio beside its returns, and it is the only document that also shows the plan-level charges. It is usually filed in the same place as your statements.
4. Add the plan administration fee to the fund fee. That total is your real drag, and it is the number to compare against the table above.

What if your plan has nothing cheap?

Some menus genuinely have no good option. Here is the order we would work through.

Contribute to the match regardless. A 50% employer match is a 50% return before a cent is invested, and no expense ratio in existence competes with that. Paying 1.30% to capture a match is still the best trade available to you, which is the argument in what the 401(k) match is actually worth.

Then look for the index option, whatever it is called. Almost every plan has one, often buried, often named after the index rather than described. A fund tracking a broad index at 0.20% beats an actively managed fund at 0.95% on the only variable you can see in advance.

Above the match, consider an IRA instead. You choose the provider and the fund, so the menu problem disappears. The 2026 IRA contribution limit is $7,500, or $8,600 if you are 50 or over, per the IRS.

Ask. In writing, with the numbers. Plan sponsors have a legal duty to monitor fees, and a short email to HR naming your plan's total drag against a published alternative is more effective than it sounds. It is also free, and it takes about twenty minutes.

And when you leave, move it. The plan fee follows the balance, not the job. An old 401(k) sitting in an expensive plan is the easiest $50,000 most people will ever fix, which is what what to do with an old 401(k) works through.

When this does not apply

If your balance is small and your contributions are new. On $3,000, the difference between 0.04% and 0.85% is about $24 a year. It is still worth fixing, because it is a five-minute fix that never needs doing again, but it is not worth delaying the contribution over. Put the money in first, then pick the cheaper fund.

If the expensive fund is the only way to reach an asset class you actually want. Some 401(k) menus have no international fund under 0.60%. Paying it is a defensible choice. Paying 0.85% for a US large-cap fund when the same plan offers an S&P 500 index at 0.05% is not.

If selling would trigger a tax bill. In a taxable account, switching funds means realising gains. Work out the tax first: a 15% long-term rate on a $40,000 gain is $6,000 today against a fee saving that may take years to catch up. In a 401(k) or an IRA there is no such problem, and you should switch today.

If the fund is not doing the same job. This whole comparison assumes two funds holding roughly the same thing. A 0.85% fund holding something genuinely different is a different argument, and the question becomes whether you want what it holds, which is a portfolio question rather than a fee question.

Next steps

1. List every fund you hold and write its expense ratio beside it. Ten minutes.
2. Add your plan's administration fee to get the real drag, then find the row it sits on in the table above.
3. If the total is over 0.50%, find your plan's cheapest broad index fund and switch future contributions to it this week. Existing balances can follow once you have checked for any trading window your plan imposes.
4. If you are still contributing above the match into an expensive menu, open an IRA and send the excess there instead.